For Best Buy, buyback program was a costly dud

Lawsuit alleged the company couldn't launch it in time for Super Bowl ad.

By
DAVID PHELPS
Star Tribune

December 29, 2012 — 9:08pm

, Associated Press - Business WireWhat was supposed to be an act of inspiration — a Super Bowl ad featuring pop music star Justin Bieber and rock veteran Ozzy Osbourne — turned into a vehicle of desperation for Best Buy.

What was supposed to be an act of inspiration -- a Super Bowl ad featuring pop music star Justin Bieber and rock veteran Ozzy Osbourne -- turned into a vehicle of desperation for Best Buy.

The 30-second segment, purchased for the 2011 Super Bowl, would serve as a splashy debut for Best Buy's "Guaranteed Buyback" program, an incentive plan for consumers to upgrade their electronics. But Best Buy was behind schedule with its software, and the big game was fast approaching. So the world's largest consumer electronics retailer sought help from a small California firm, TechForward, according to court documents.

"Best Buy was under the gun and needed a way to organize," according to a court filing by TechForward.

By all appearances, the buyback program's kickoff was a success. The Super Bowl spot garnered the attention of millions and critical praise, many amused by Osbourne's quizzical line, "What's a Bieber?"

But the kickoff was preceded by months of misdeeds and broken promises, according to TechForward. The firm accused Best Buy of stealing its proprietary software designs and dumping it two months into the project, which cost a potential payout of $20 million per year. A California jury awarded TechForward $22 million in damages in November.

Trade secret disputes are common in the business world, where corporate intelligence gathering is a way of life, experts say. And often, the disputes occur between a large company and an upstart with an innovative idea. But the TechForward-Best Buy battle was unique because the little guy prevailed, said Sharon Sandeen, a professor at Hamline University School of Law who specializes in trade secret issues.

"There are not many small companies that can afford to pursue ... litigation," Sandeen said. "The key here is that TechForward had a confidentiality agreement with Best Buy."

In a brief seeking the punitive award, attorneys for TechForward wrote, "Best Buy's conduct fell woefully short of basic standards of decency." The presiding judge agreed, tacking on $5 million in punitive damages against Best Buy.

Best Buy argued there was no financial harm to TechForward because it was a small firm that had operated five years without being profitable. Best Buy also asserted that none of its officers authorized the use of TechForward's trade secrets, and if trade secrets were misappropriated, it was done at a lower staff level.

"We disagree with the size of the award given the facts of the case, and intend to challenge the verdict through all means, including appeal," Best Buy spokeswoman Paula Baldwin said in a statement to the Star Tribune. The company declined to comment further.

Despite the promising start, Best Buy's buyback program eventually fizzled, and the company began to shutter it 14 months after the Super Bowl ad hit the airwaves.

By September 2010, Best Buy already was committed to a $30 million advertising campaign centered around the 2011 Super Bowl, TechForward said in court documents.

Best Buy's Super Bowl ad would be its first during the big game. The company paid $3 million for the spot. Production costs, including the appearance of Justin Bieber and Ozzy Osbourne, likely added $2 million, industry experts estimated.

"It can make a lot of sense if a retailer has a footprint nationally to justify it," said Mike Caguin, chief creative officer for the Minneapolis agency Colle+McVoy. "You have 111 million viewers and the majority of them are within driving distance of a Best Buy. Being on that stage speaks volumes to consumers. It says this is a brand that is here to stay."

The marketing push was designed to promote the "Guaranteed Buyback," in which consumers could return certain electronic items and receive credit based on how long the items were used. The concept was supposed to be an incentive for consumers to upgrade when a new generation of a product was unveiled.

The issue for Best Buy was getting the mechanics in place to coincide with its Super Bowl promotions, TechForward said in court filings.

"Best Buy had a problem," TechForward's attorneys wrote. "Though it had committed to a national launch ... Best Buy knew that it would not be able to accomplish that task on its own in time for the Super Bowl."

TechForward already had developed software to calculate buyback values for electronic goods like cellphones and televisions. One Best Buy executive told TechForward that it "could be a couple of years" before Best Buy had something comparable to the California company, TechForward said in court documents.

With a promise of confidentiality, Best Buy asked TechForward to share its proprietary designs to keep the project rolling. "After Best Buy had taken all it needed from TechForward, it cut TechForward loose without warning at a meeting on Oct. 19, 2010," the company claimed.

TechForward's founders, Jade Van Doren and Marc Lebovitz, did not respond to requests for comment; neither did a representative of First Round Capital, a venture capital group that invested in TechForward.

Sandeen, the law professor, said it is not unusual for large companies to cannibalize the intellectual property rights of smaller companies. In many cases, the big companies assume that the smaller ones will not have the legal resources to fight.

"I don't think large companies want to go out and rip off the intellectual property rights of small companies, but they are more likely to be disrespectful of those rights," Sandeen said.

In this case, TechForward's investors financed the lawsuit with their own funds, even as TechForward struggled financially.

For Best Buy, the courtroom defeat compounds the failure of the buyback program, which company executives thought would earn "tons of cash," according to court documents. Indeed, TechForward said Best Buy promised the firm that it would earn up to $20 million a year through its partnership with the retailer.

Such was not the case.

In its brief seeking to limit punitive damages, Best Buy said the program "was a disastrous loss" and was phased out in 2012. The company declined to characterize those losses.

TechForward struggled after it lost the Best Buy account and was sold earlier this year for an undisclosed amount. According to Best Buy, the judgment gave TechForward something it couldn't attain on its own.

"The jury has made TechForward a highly profitable entity, a result that TechForward was never able to achieve in the marketplace," Best Buy said in a court filing. "TechForward never turned a profit and sustained itself through the largess of its investors."

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